What Are the Top 5 Reasons Businesses Fail?

To be successful in business, it’s prudent to understand not only the markers of success, but also the warning signs of potential business failure. While it’s heartening to see an 8.2% increase in companies incorporating in the UK in January to March 2023 compared to the same quarter last year, there’s also an 8.6% increase in companies dissolving in the same quarter. When we understand what are the top 5 reasons businesses fail, savvy business owners can plan to avoid those dangers and chart their course to business success.

What Are the Main Reasons Why Companies Fail?

There are a multitude of reasons why companies fail, some of which are domestic or global events outside of a business owner’s control, others that are very much able to be anticipated and planned for. Let’s consider the main reasons why companies fail.

What Are the Top 5 Reasons Businesses Fail?

  1. Negative cash flow
  2. Lack of leadership and insufficient business planning
  3. Inability to adapt to changing market demands
  4. Supply chain issues impacting production
  5. ESG concerns

Most Common Causes of Business Failure

Negative Cash Flow

Cash flow is the top of the list when considering what are the top 5 reasons businesses fail.  While statistics vary, insufficient cash flow accounts for a vast proportion of business failure. Zippia.com cites cash flow as causing as high as 82% of business closures. Even profitable businesses can struggle due to insufficient cash flow if too much of their finances are held up in consumer credit or in inventory. Fortunately, with professional solvency advice, this can often be reversed, and a company can recover from negative cash flow.

Lack of Leadership and Insufficient Business Planning

Every ship needs a captain that can steer steadily in rough seas as well as calm. Your business is no different. Strong leadership and sound planning are crucial to business success. Strong leadership fosters trust, transparency, and stability. Without those qualities a company can find itself in difficult waters. A strategic plan is an integral part of a successful business. It’s not enough to just have a business plan, it needs to be a living document that’s followed, reviewed, and adapted to market changes.

Inability to Adapt to Changing Markets Demands

Several hugely successful international companies have failed in recent years. The cause? For some at least, it was failing to anticipate and respond to changing market demands. Tech advances have rendered once-thriving businesses (such as Blockbuster) largely irrelevant as customers changed the way they purchased and consumed content. Being aware of emerging trends and adapting to customers needs and preferences can help a company to remain relevant and viable. Failing to do so can result in business failure.

Supply Chain Issues

The pandemic, Brexit, and a war in Europe, have all had a large impact on supply chains across many sectors. Supply chain issues can add to production and shipping costs, blow out timeframes, and bring a business to its knees, but it doesn’t have to be that way. According to the Boston Consulting Group, ‘concrete actions such as supply chain diversity and flexible working practices…can boost resilience and drive better business performance’. This is a key factor in retaining talent amongst the workforce, with employees demanding increased flexibility in their working lives.

Environmental, Social, and Governance Concerns

According to a recent article in Forbes Magazine, ESG, or environmental, social, and governance concerns, are becoming increasingly important to consumers and employees. Many consumers want to know that the products or services they are buying have sound environmental and social impact throughout the whole supply chain. The so-called triple bottom line of ‘people, planet, and profit’ and transparency around that can affect trust in a business and impact market share and profitability. These are both factors that can lead to business success if handled well and business failure if not addressed.

How Can Irwin Insolvency Help with Your Business Success?

While a staggering number of businesses fail, your company doesn’t need to join that number. Knowing what are the top 5 reasons businesses fail, can help you make sound business decisions to help your company recover from threats to its financial viability. At Irwin Insolvency, we’re experts at helping businesses recover and restore profitability.  Contact Irwin Insolvency today for professional and tailored advice.


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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.